3 Insurance Products You Probably Didn’t Know About – But Should Be Using

Let’s face it, none of us really love paying for insurance unless it’s that rare moment when we actually need it and all of a sudden we’re eternally grateful.

As a former life and annuity insurance agent and a partner in a title insurance company I’m well aware of the fact that as real estate investors – we all need the obvious types of insurance. Of course you most likely need title insurance when you buy a property, and it usually makes good business sense to have Homeowners’ Insurance on a property as well. As for mortgage insurance many times you can get more bang for your buck with life insurance, but mortgage insurance can also make sense in some cases too – like if you were ineligible for life insurance. But what about some of the not so obvious ways of using insurance?

The 20 Best Books for Aspiring Real Estate Investors!

Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.

Why Use Insurance?

One thing I learned a long time ago when I was doing financial planning was how the truly wealthy individuals insured all their investments and today I strive to do the same. For example, I learned when it comes to stocks and bonds they utilized things like “stop-losses” and “puts” and “calls” in tandem. As a hedge against inflation they would invest in real estate AND in precious metals. If their real estate holdings were large they might utilize an appreciation tactic where you place a “put-option” on a real estate stock like “Pulte” or “Toll Brothers” to ensure your real estate holdings.

That was almost 20 years ago, so now I even play a game with how I use insurance for my investing. For example, I recently had some of my private money lenders in town and we were going to dinner. So, I wanted to insure we’d have a good meal. I proceeded to take the waiter aside to give him his tip in advance. I asked him, “Could you take good care of my out-of-town friends for me, I’d really appreciate it?” And as you can guess he was more than happy to oblige. The point here is you’re leaving a tip anyway, why not do it in advanced and insure a good meal? And who knows, maybe that would insure me some more private capital! It’s just one of those gestures that seems to go a long way. All business relationship tips aside, there are at least three hugely IMPORTANT strategies I feel as though every investor should know when it comes to utilizing insurance.

1.) Insurance as a Bucket

Like many investors, I’ve always used entity selection and titling to keep investments in different buckets. I do this so as to keep things separate in case of something like a lawsuit, so say something happened at one property in one entity, they couldn’t take my apartment building that’s in another entity. I even take that one step further with having multiple retirement accounts even, but that’s neither here nor there.

Now I know what some of you are thinking, “Yeah, well I already do that.” But I have to ask; do you know that you can do something similar with insurance? For example, cash value inside a life insurance policy safe from lawsuits but it’s safe from being included in a bankruptcy as well. You can also use an umbrella insurance policy for additional liability protection, covering almost anything above and beyond your normal liability component of your existing insurance. For the list of the best cash value life insurance companies, check out our friend, Chris Huntley’s new company comparison tool.

2.) Insurance as a Private Bank

Another great tactic I’ve learned and utilize today is using a life insurance policy as a private bank for personal use and/or investments. I do this because it’s a tax favored environment for investing since cash value in life insurance policies builds tax free usually at a rate of about 5% and you can take it out ANY time to invest (as a loan with a low rate of interest).

Many times insurance salesmen try to get you the most death benefits as possible and a low cash value, but for you the savy investor, that isn’t always the best way. In fact it’s often better to overfund the policy, take a high cash value (as opposed to death benefit) that grows at 5%, and after borrowing it out investing it in something that makes even more on top of that. You could even theoretically borrow money out and never pay it back, having it only reduce your death benefit. Other advantages to it aside from being protected from lawsuits or bankruptcy (as stated above), life insurance policies also pass favorably to heirs.

3.) Home Warranty Insurance

Several years ago when I was a RE/MAX agent selling properties exclusively to real estate investors, a common strategy that I would see employed by the less handy investors was utilizing a home warranty policy. My one buddy, who couldn’t change a light bulb, would buy a row home or townhome, and right at closing he would put a home warranty on the property for about $400-$500 a year. This would cover everything but the roof which he had inspected already and was either new or just coated. Then he would build in the $75-$100 deductible into the lease for the tenant to pay the first hundred dollars in repairs, and he would tell them to just call the 800-number if they needed any repairs at all. Not a bad model when you really think about it.

So, what are some things you do to ensure success with your real estate investments?
Photo: David Hilowitz

Free eBook from BiggerPockets!

Join BiggerPockets and get The Ultimate Beginner's Guide to Real
Estate Investing for FREE - read by more than 100,000 people -
AND get exclusive real estate investing tips, tricks, and techniques
delivered straight to your inbox twice weekly!

About Author

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

20 Comments

Interesting article Dave:I have never heard of or considered the life insurance strategy but a darn good one. I hear that rental insurance or should I say rental assurance is becoming a popular tool. especially in areas that tend to be considered a pro tenant state. Do you have any insights into these policies?

Tim Norris (who commented below) would probably be a better person to ask about this! I know there’s insurance for loss of rents and I’m sure there’s instances where it’s worth buying it. I’m only really familiar using it with regards to property damage, but I know there’s a variety of rental insurances policies out there that could be beneficial.

I wouldn’t have a property without a home warranty. Figured out long ago that it is not only the coverage, but the time savings for me when something goes wrong. One call….and it’s done. Time is money!

I really like step number 2. However, I must admit that I’m very biased being that I help people overfund life insurance policies on a regular basis. Another advantage of this strategy not mentioned above is that these life insurance companies charge interest to borrow the cash value from your policy. That interest charged can be a tax write-off in most cases. What do the insurance companies do with that interest that they charge? They essentially turn around and credit it right back to your account where it can grow/compound with tax-free potential. Essentially you are getting a tax write off to make money when your fellow real estate investors/peers are getting no tax write offs.

I started this type of life policy for these very reasons. Time will tell if it was wise, but I view it as the conservative part of my retirement strategy. The book that explains a lot of the concepts is Bank on Yourself by Pamela Yellen. A good chunk of the book is like reading a giant sales pitch (very annoying), but it covers everything and just take it with grain of salt. Thankfully, I have an awesome agent who made the process of getting the policy fairly painless.

Just the word “insurance” makes my brain freeze. It always feels like we’re overpaying for something we’re afraid to ever use. Like a mysterious game you can never win.

You gave some great tips. I especially like the idea of purchasing a home warranty policy,
building the deductible into the lease which has the tenant pay the first hundred dollars in repairs, then having the tenant simply call the 800-number if they needed any repairs at all. Oh, can it be that easy????

I have found that whole life policies are more expensive than their value. They are a lot like a mortgage, where the front end is loaded with costs and expenses, and you have to wait a long time to actually get the value of the policy. Simple term insurance is better to protect the loved ones in case you move on unexpectedly.

Home warranties are a given on any old house to protect the mechanical items in a property. Good info.

Would like to see an article that discusses Business Insurance and Workman’s compensation in the future, as many investors who do any flipping do not know the pitfalls of hiring people off the streets with 1 or the other, but not both.

You’re correct in regards to what the traditional insurance agent is probably selling you; a life insurance policy that’s focused on a high death benefit and not on the cash value side. If you’re interested in utilizing an insurance policy as an investing tool, my point with the article was to suggest a low death benefit and high cash value policy (so as to invest with the cash). You can also supplement this type of policy with a term policy to get additional benefits.

Home warranties are a waste of money in my opinion. They always have some way to weasel out of doing repairs. Plus there is usually some sort of co-pay. I’ve had two home warranties (that I didn’t ask for) and tried to make 3 claims – none of them successful.

For instance, the flyer from the home warranty company that I was given at closing a year or two back said the garage door opener was covered. When my garage door opener died due to a lightning strike they would not cover it. They pointed to the contract that said it covered garage doors but not the opener. Funny how their flier didn’t line up with the contract and funny how they wouldn’t give a copy of the contract until after close.

Save your money by not buying a home warranty and put it towards repairs instead.

I always have a home warranty, but I do not like the idea of building the deductible into the lease for the tenants to pay. This puts negative pressure on getting things fixed (what renter wants to pay $55 to fix an appliance YOU should be paying for). It is not a fun thing to walk into a rental only to find the stove burner does not work, ice maker is broken, and heating element in the dishwasher is burned out. If I pay the deductible it is more likely these things will be repaired and maintained properly.

I generally say that home warranties are a waste of money as well. I don\’t really see the point. I suppose some people like them and look at them like insurance but I think they cost too much for the value you get.